Deere & Company: In Maintenance Mode? Earnings Analysis

Aug.29.13 | About: Deere & (DE)

Deere & Company (NYSE:DE) discussed its Q3 2013 earnings recently; the company also announced a quarterly dividend of $0.51 a share yesterday. Other competitors in the Producer Manufacturing Sector that have recently reported results include Joy Global (NYSE:JOY) and Caterpillar, Inc. (NYSE:CAT). This analysis of Deere & Company based on preliminary financial results for the quarter ended July 31, 2013, complements our fundamental analysis on Caterpillar published today.

Our analysis is peer-based (there is a list of peers at the end of this article) and is based on the company's performance over the last 12 months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income, and returns.

Quarterly (USD million) 2013-07-31 2013-04-30 2013-01-31 2012-10-31 2012-07-31
Revenues 10,009.9 10,913.5 7,421.4 9,791.6 9,590.4
Revenue Growth % (8.3) 47.1 (24.2) 2.1 (4.2)
Net Income 996.5 1,083.9 649.6 687.5 787.8
Net Income Growth % (8.1) 66.9 (5.5) (12.7) (25.4)
Net Margin % 10.0 9.9 8.8 7.0 8.2
ROE % (Annualized) 47.3 55.1 36.3 38.6 42.7
ROA % (Annualized) 6.8 7.7 4.7 5.0 6.0
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Valuation Drivers

Deere & Company currently trades at a higher price/book ratio (3.8) than its peer median (2.8). Deere's operating performance is higher than the median of its chosen peers (ROE of 42.8% compared to the peer median ROE of 15.6%), but the market does not seem to expect higher growth relative to peers (P/E of 9.7 compared to peer median of 11.2) -- rather, simply to maintain its relatively high rates of return. The company attempts to achieve high profit margins (currently 9.0% vs. peer median of 7.0%) through differentiated products. It currently operates with peer median asset turns of 0.7x. Deere's net margin is its highest relative to the last five years and compares to a low of 3.8% in 2009.

Capital Investment Strategy

Deere's annualized rate of change in capital of 10.2% over the past three years is less than its peer median of 14.3%. This below median investment level has also generated a less than peer median return on capital of 7.8% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.


Deere & Company's analysis vs. peers uses the following peer set: Caterpillar, Komatsu Ltd. Sponsored ADR (OTCPK:KMTUY), Kubota Corporation Sponsored ADR (OTCPK:KUBTY), CNH Global NV (NYSE:CNH), AGCO Corporation (NYSE:AGCO), PT United Tractors Tbk (UNTR), and Joy Global Inc. (JOY).

Sector: Producer Manufacturing

Industry Group: Trucks/Construction/Farm Machinery

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.